Tuesday, April 28, 2015

SEC Staff Allows Hertz to Award Equity Compensation Despite Tardy Filings

By Matthew Garza, J.D.

The SEC staff has granted no-action relief to Hertz Global Holdings, Inc. to allow the company to grant equity compensation awards to employees despite the fact that an ongoing review of recent financial statements has prevented it from being current in its reporting obligations. Because the company does not expect to complete a review of its 2012 and 2013 financial statements until mid-year, it is not eligible to use Form S-8 to register the shares it plans to award pursuant to its employee compensation plan. The staff agreed that the awards would not represent an “offer to sell” or “sale” of unregistered securities under Securities Act Section 2(a)(3) and recommended no action be taken against the company if it awards the stock without registration (Hertz Global Holdings, Inc., April 21, 2015).

Restatement. According to the incoming no-action request letter, Hertz said it identified certain accounting errors during preparation of its first quarter 2014 Form 10-Q. The errors related to Hertz's conclusions regarding the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, as well as other items. The company’s audit committee thereafter consulted with management and concluded that it must restate 2011 financial results, and ordered a review of financial records for fiscal years 2011, 2012 and 2013 to determine whether further adjustments were necessary. Additional findings caused the company to conclude that 2012 and 2013 annual and quarterly financial statements must also be restated. The company disclosed that it would not complete the process of reviewing and filing updated financial statements before mid-2015.

Compensation plan. Hertz said that it was concerned that if it was unable to issue the equity awards it would not be able to retain key employees. Also, replacing the equity grants with cash awards or bonuses did not fit with the company’s approach to providing both long-term and short term incentives to employees. The company considers the equity awards important to both motivate and retain employees.

The company said the awards will be made to employees identified by its compensation committee and will be pinned to achievement of annual EBITDA results for 2015, 2016, and 2017. None of the employees are considered affiliates of the company within the meaning of Securities Act Rule 405, and the awards will cover a maximum of 800,000 shares of common stock, representing approximately 0.2 percent of the company's outstanding common stock.

Conditions. Hertz said the award agreements will not vest prior to such time as the company is caught up with its Exchange Act reporting obligations. Unvested portions of the awards will be forfeited upon termination of employment. The company said it will also treat all shares awarded on a “no-sale” basis as “restricted securities” within the meaning of Securities Act Rule 144 and recipients must agree as a condition to the award that none may be sold until the company has an effective Securities Act registration statement relating to the awarded shares.